Two advisor trade groups - the Securities Industry and Financial Markets Association and Financial Planning Coalition, which consists of the Certified Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors - finally sent in their comment letters to the Securities and Exchange Commission regarding Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or what the commission should do about enforcing a blanket fiduciary standard for all financial advisors.

That paragraph, almost as much fun to read as it was to write, masks a real battle being waged on Capitol Hill—advisors regulated by Finra, a self-regulatory organization, squaring off against advisors registered with the SEC.

At issue is whether retail investors are protected enough by Finra’s suitability requirement—which Dodd-Frank’s Section 913 implicitly implies it doesn’t—or whether all advisors should be held to the more stringent fiduciary standard, as FPC members all do voluntarily through their group memberships and involuntarily as registered investment advisors, who are subject to the Investment Advisers Act of 1940 and policed by the SEC.

It’s an argument that’s simmered for a long time. Back in 2005, the SEC famously exempted Series 7 financial advisors from having to adhere to the 1940 Act’s fiduciary standards in what became known as the “Merrill Rule.” RIA groups have pushed for the exemption to be lifted ever since, commissioning the RAND Institute Report in 2008, which was intended to prove to the SEC that investors didn’t know the difference between a brokerage relationship and an advisory relationship.

With Section 913 in the works, the iron is red hot again and the FPC, in a comment letter to the SEC on Aug. 30, is not missing its opportunity to once again urge that the regulator adopts a blanket fiduciary standard. “The Commission should not allow certain firms to provide personalized investment advice to retail customers at a lower standard simply to accommodate those firms’ business models,” The FPC says in its letter.

The comment is a far-from oblique reference to the brokerage industry’s argument against a fiduciary standard, that it would prevent its advisors from providing certain kinds of products to clients who want them. “The Advisers Act… was not intended or designed to apply to incidental advice offered in connection with specific non-discretionary, commission-based transactions that broker-dealers frequently provide,” SIFMA complains in a letter also filed Aug. 30.

What, for example, would happen to cash sweep services so customers can earn interest on their cash balances, online tools that don’t offer specific investment advice and what about lending or margin account features, it asks?  And what happens if a client wants to invest more aggressively than is prudent? A fiduciary would be required to walk away.

The whole issue of commissions puts the FPC in something of a quandary. On one hand, a investor who just wants to make a one-off purchase of a product and has no desire for follow up is often better off paying a commission rather than an ongoing fee. On the other, commission pricing on certain products can motivate an advisor to recommend a higher-paying product over another, something that’s fine under Finra rules so long as the product is suitable to the client’s time horizon and risk tolerance, but would not be an option a true fiduciary would offer.

The FPC’s compromise is to provide an asset-based pricing model wherever it makes the most sense, but for fiduciary advisors to recommend clients pay a commission when that’s the cheapest payment option. Where the advisor intends to have an ongoing relationship with the client, though, the “fiduciary standard must continue throughout the course of that relationship. When a broker-dealer only sells proprietary products, advisors should recommend comparable products on the open marketplace if they’re cheaper, it says.

Generally speaking, though, the FPC remains adamant that “permitting a modified or watered down version of the ‘fiduciary’ standard to accommodate different business models would completely frustrate the interests of eliminating client confusion,” and any concession to Wall Street’s preference for more flexible regulatory standards is unlikely to play well on Main Street. “The Commission should not mold the fiduciary standard to accommodate business models with substantial embedded conflicts of interest,” crows the FPC, and this includes preventing the industry from regulating itself: “the Coalition believes the Commission should not give Finra any new role in the oversight of investment advisers,” it says.

For SIFMA’s part, while it doesn’t want SEC oversight (“SIFMA believes the current high standards and stringent rules for broker-dealers should continue to apply,” i.e. Finra oversight), its letter implies that the group sees the writing on the wall when it asks the SEC at least to grandfather existing client relationships. “Accounts established prior to the effective date of the standard should not be required to have written consent to those disclosures” which would clearly delineate advisory and brokerage relationships and the standard of care clients are to expect from each. “Requiring written consent from millions of existing retail customers would be unduly burdensome… In a worst-case scenario, a broker-dealer or investment adviser would not be able to continue effecting transactions for a customer if the retail customer failed to return a [signed] disclosure document.”

Ironically, both SIFMA and FPC argue for a “well-defined standard of care for broker-dealers and investment advisers.” As ever, though, the two groups have very different ideas about how to get there.

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